Whack-A-Mole and the Debate on Donor Advised Funds

The following remarks were presented at The Urban Institute’s Conference on Donor Advised Funds: How Have They Changed Philanthropy? on June 16, 2015, in Washington, D.C.

Almost overnight, donor advised funds (DAFs) have moved from nearly 85 years of obscurity to facing the spotlight of intense public scrutiny about their use and operations. Much of this discussion has resembled a game of Whack-A-Mole. Claims are made, knocked down by facts, only to have new claims made to be knocked down by other facts. The unfortunate result of this has been to undermine the public’s trust in DAFs and philanthropy more broadly.

To date, the DAF discussion has largely ignored important distinctions between different types of DAF providers. We readily accept that community banks, commercial banks, investment institutions and credit unions, while offering similar services, do not play the same roles within the financial banking ecosystem. Similarly, community foundations, commercial gift funds, ethnic and women’s funds and universities while offering DAFs do not all have the same relationship with their donors’ philanthropy, play leadership roles within their communities or serve the same purpose within the larger philanthropic ecosystem. Public policy should be targeted to address specific problems as proven to be manifested by specific types of institutions.

Without any statistical or anecdotal evidence, critics speculate that DAFs are being used by the wealthy to “park” money. They offer no definition of what constitutes “wealthy” or offer any explanation as to why a donor would establish a DAF with no intention of ever recommending a grant. SVCF has over 1,047 DAFs and funds can be opened with a minimum of $5,000. In 2014, SVCF distributed $474 million from all sources, of which, donor advisors recommended $134 million to local Bay Area nonprofit organizations.

Describing DAFs as vehicles for parking money is a loaded phrase. We do not claim that people who save to achieve a future goal such as paying for college, or buying a house, are parking money. Having different approaches for accumulating and strategically deploying charitable capital for current and/or future use has served nonprofit organizations well in good economic times and bad.

Multiple independent studies have consistently shown that various DAF providers have aggregate pay-out rates ranging from 15-20 percent. Undaunted, critics shift to unsubstantiated suppositions coupled with math tricks. They say, consider a DAF provider with 10 donor advised funds of $100,000 each. Two of the funds spend out $100,000 in one year and eight distribute nothing. The aggregate average payout would be 20 percent, supposedly proving how DAF payout rates can hide inactivity by the majority of funds. This example is both disingenuous and dangerous.

Are there DAF providers with only 10 funds? Is there any evidence that one out of five DAF donors (20 percent) establish a strategic method for engaging in philanthropy only to distribute all of their charitable resources in the very same year? Other than creating misinformation, why, and based on what facts, would anyone suggest that four out of five DAF donors (80 percent) do not make any grant recommendations in a given year? These are the contorted underlying assumptions required to make this math trick work.

The statistical profile of SVCF’s DAFs paints a completely different picture. In 2014, SVCF had 158 funds with balances over $1 million with an average payout rate of 15.7 percent. This payout rate is more than 3 times the required minimum 5 percent payout rate for private foundations. For SVCF DAFs with balances of $100,000 - $1 million (314 funds), the payout rate was 57 percent – more than 11 times the payout of private foundations.

Only seven of SVCF’s funds with balances of $1 million or more (4 percent) did not make any grant recommendations during the prior two years (2013 and 2014). SVCF contacts every donor if their DAF becomes inactive over a two year period to engage them in grantmaking.

Let’s revisit the math trick and suppose that instead of 10 donor advised funds there are 10 private foundations with endowments of $100,000 that meet their annual minimum payout requirement of 5 percent. Collectively, these 10 foundations will distribute $50,000 compared to $200,000 by just two of the 10 donor advised funds. Does this comparison help inform public policy on charitable giving in any useful way? The answer is: Of course not, because context matters. This is the problem with using unrealistic scenarios, unsupported by any facts, to shape public policy.

Not surprisingly, critics raise yet a new concern about so-called orphan funds that occur when a DAF donor dies without a bequest provision. The concern is whether such funds are directed into endowment funds or are immediately distributed. Since SVCF’s founding in 2007, we have had only one such orphan fund which was placed into our endowment fund for the benefit of our local community, as is our policy.

The nonprofit sector has been well served by having a diverse and robust philanthropic ecosystem that encourages freedom of giving choices regardless of whether the giving occurs today, tomorrow or is structured to last in perpetuity. So what two things are likely motivating concerns about charitable giving? First, the nonprofit sector is in jeopardy of losing the public’s trust. It is essential that the sector engages in full public accountability and transparency as well as strenuously calling out abuses. Second, America faces enormous unmet social and infrastructure needs and growing income inequality with little public support to raise taxes. Nonprofit organizations, experiencing dwindling public financing, have focused on the growth of DAFs, and endowments more generally, as perhaps their only remaining lifeline for providing much needed services.

Charitable funds cannot meet the tremendous needs that exist in our communities. America is long overdue to engage in a national dialogue about how to fix our broken social contract and re-invest in our deteriorating infrastructure. The nonprofit sector needs to be at the forefront of leading this critical conversation and we have no time to waste playing children’s games like Whack-A-Mole.